Labour Market and Fiscal Policy Adjustments to Shocks: The Role and Implications for Price and Financial Stability in South Africa

617 Pages·2017·19.19 MB·English

by  Nombulelo Gumata

L a b o u r M a rk e t
a n d F i s c a l Po l i c y
A d j u s t m e n t s
t o S h o c k s
The Role and Implications for
Price and Financial Stability
in South Africa
NOMBULELO GUMATA
AND ELIPHAS NDOU
Labour Market and Fiscal Policy
Adjustments to Shocks
Nombulelo Gumata • Eliphas Ndou
Labour Market
and Fiscal
Policy Adjustments
to Shocks
The Role and Implications
for Price and Financial Stability
in South Africa
Nombulelo Gumata Eliphas Ndou
South African Reserve Bank South African Reserve Bank
Pretoria, South Africa Pretoria, South Africa
ISBN 978-3-319-66519-1 ISBN 978-3-319-66520-7 (eBook)
DOI 10.1007/978-3-319-66520-7
Library of Congress Control Number: 2017955038
© The Editor(s) (if applicable) and The Author(s) 2017
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether
the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of
illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and
transmission or information storage and retrieval, electronic adaptation, computer software, or by similar
or dissimilar methodology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication
does not imply, even in the absence of a specific statement, that such names are exempt from the relevant
protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information in this book
are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or
the editors give a warranty, express or implied, with respect to the material contained herein or for any
errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional
claims in published maps and institutional affiliations.
Cover illustration: © Andreas Schlege / Getty Images
Printed on acid-free paper
This Palgrave Macmillan imprint is published by Springer Nature
The registered company is Springer International Publishing AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Preface
This book focuses on the implications of the South African labour markets
dynamics, including reforms and fiscal policy for monetary policy and
financial stability. The analysis contained in the book demonstrates the
benefits that arise from the interaction and coordination between labour
markets dynamics, including reforms, fiscal policy, financial stability and
monetary policy. The evidence shows that the coordination of policy
interventions can alleviate pressure on other overburdened policy tools.
In addition, the coordination of policies might lead to a new normal
characterised by a lower path or trajectory for other policy tools.
At the same time, the benefits of coordinating the policies may offer nec-
essary and valuable policy options in dealing with policy cases where poli-
cymakers are confronted by binding policy trade-offs and dilemmas, such
as in cases when there is divergence in price, financial and economic
growth outcomes. The evidence in the book shows that in such cases, for
instance, loosening labour market reforms might contribute to achieving
lower inflation and high economic growth outcomes. The adjustment of
monetary policy settings alone is unable to achieve these outcomes,
although monetary policy might be used to deal with other risk factors
for the inflation outlook. The key message is that there are benefits to
adopting an approach that coordinates labour market, fiscal, price and
financial stability policies.
v
vi Preface
This book discusses empirically based insights rooted in different tech-
niques that include the counterfactual approaches which show what
would have happened under certain circumstances and scenarios, and the
endogenous–exogenous approaches, non-linearities introduced by
thresholds and the impact of persistent and transitory shock effects. The
techniques complement each other as they show different aspects of the
impact of dynamic responses to shocks. Consequently, the combined use
of these different quantitative techniques presents the reader with robust
empirical evidence and policy recommendations. The book comprises
eleven parts all aimed at filling existing policy and academic research
gaps. Overall, the evidence contained in the book shows that labour mar-
ket dynamics including reforms and fiscal policy matter for the price and
financial stability mandates. The synopsis of the research issues covered in
this book expressed in thematic issues is outlined below.
Labour Market Features and Monetary Policy
The South African economy is characterised by persistently high unem-
ployment, a high level of unfilled job vacancies and low labour force
participation rates. The relationship between the unemployment rate and
job vacancies is encompassed in what is referred to as the Beveridge curve,
whereas the link between the unemployment and the labour force par-
ticipation rate is captured by the unemployment invariance hypothesis. This
book investigates the validity of the Beveridge curve and the unemploy-
ment invariance hypothesis in South Africa in the context of the imple-
mentation of the labour market structural reforms. This part of the book
focuses on establishing whether the South African data confirms the exis-
tence of the Beveridge curve and the unemployment invariance hypoth-
esis. Thereafter, the implications of the findings for labour market
dynamics and price stability are explored by showing how the six per cent
inflation target band as the threshold impacts the inflation-GDP-
employment growth nexus in South Africa.
Prefac e vii
The Minimum Wage and Theoretical
Predictions
To date, the price stability mandate has been absent in discussions of the
impact of the national minimum wage. We provide empirical evidence of
the various channels through which the minimum wage is transmitted to
the real economy. The second part of the book focuses on minimum wage
shocks and the theoretical predictions. This part of the book brings the
South African labour market structure into the discussion of the implica-
tions of the national minimum wage for the price stability mandate. The
effects that are examined include determining the labour market struc-
ture model predictions that are consistent with the effects of a positive
minimum wage shock on inflation in South Africa and the implications
for price stability. We also show the effects of positive minimum wage
shocks on income inequality as measured by the Gini coefficient and the
extent to which effects are impacted by the price stability mandate. The
book further offers insights on the extent to which South African evi-
dence is compatible with the wage efficiency hypothesis and labour produc-
tivity following a positive shock to the minimum median wage. This is
further complemented by the determination of capital-labour ratio
dynamics due to a positive minimum wage shock and the role for price
stability.
Labour Market Reforms and Price Stability
Part three of the book focuses on labour market reforms and price stabil-
ity. We argue that an unexpected loosening of labour market reforms will
be beneficial to the price stability mandate. The beneficial effects include
the unexpected loosening of the collective bargaining shock in lowering
inflation and inflation expectations. The analysis in this part of the book
gives more insights into the way in which labour market reforms and unit
labour costs shocks drive inflation persistence.
viii Preface
Labour Market Conditions, Labour
Productivity, Inflation Expectations and
Monetary Policy
Part four of the book deals with diverse indicators of the labour markets
developments by constructing labour market conditions indices to com-
plement the labour market indicators that were individually used in part
one. We determine the importance of labour market conditions in trans-
mitting positive inflation and inflation expectations shocks to the repo
rate reaction. We further show the links between a positive real interest
rate shock, labour productivity and the six per cent inflation threshold
and inflation expectations. The chapters in this part of the book also link
the effects of episodes of capital flow surges and sudden stops to changes in
sectorial composition of gross value added, employment and productiv-
ity growth in South Africa.
Labour Market Interactions with Elements of
Financial Stability and Monetary Policy
The South African Reserve Bank indicated that the countercyclical capi-
tal buffer was set to zero during 2016. Selected chapters in part five of the
book bring into this discourse the role of the labour market conditions
channel. This is done by testing whether labour market conditions matter
for credit and financial conditions. Weak labour productivity growth,
tight credit and financial conditions and the role banks required reserve
balances as a macro-prudential and monetary policy tool. Furthermore,
we explore whether the labor productivity and labor market conditions
indices play a role in establishing the Mian et al. (2015) hypothesis in
South African household debt dynamics. Evidence suggests that the data
confirms the existence of both credit demand and supply hypothesis.
Labor productivity and the labor market conditions play an important
role in transmitting adverse loan supply and aggregate demand shocks to
household debt growth. This means that the policymaker should consider
Prefac e ix
the transmissions and amplification effects of labor productivity and
labor market conditions in the design of macro-prudential and financial
regulatory tools aimed at dealing with the supply and demand for credit
in pursuit of the financial stability objective.
In addition, the loosening of labour market reforms is accompanied by
the tightening of banks’ reserve requirements, which results in a pro-
nounced decline in inflation. This suggests that the loosening of labour
reforms accompanied by the tightening of the required reserves as a
macro-prudential and monetary policy tool by constraining credit-driven
demand will weaken inflationary pressures and inflation expectations.
Tighter banks’ required reserve balances lessen the burden of the repo rate
adjustment to curb inflationary pressures. Overall, evidence suggests that
the loose labour market reforms shocks and the tightened required reserve
balance channels can be used as complementary tools that can lower
inflation expectation and affect the trajectory of future repo rate changes.
Wages Dynamics, Employment and Price
Stability
This part of the book separates the analysis into (i) public-private sector
wage and employment interactions and (ii) nominal wage dynamics and
price stability. The book determines whether price stability impacts the
relationship between public-sector wage growth and private-sector wage
growth. In addition, the investigation looks at the link between private-
sector and public-sector employment interactions, determinants of wages
and the role of the wage premium between the public and private sectors.
To enhance the analysis, this part examines how transitory and perma-
nent economic policy uncertainty shocks impact employment growth in
South Africa.
The seventh part of the book focuses on the nominal wage dynamics and
price stability. It explores whether there is evidence of a wage-inflation
spiral, which refers to the prevalence of a feedback link between wages
and inflation. The analysis in this part of the book determines whether
the wage-inflation spiral exists and whether the spiral is impacted by
x Preface
elevated inflation expectations and the implications of the transmission
of positive wage shocks to monetary policy reaction. This part concludes
by showing that the six per cent inflation threshold matters for the trans-
mission of nominal wage shocks to inflation expectations.
The Potency of Fiscal Policy Channels
This part of the book introduces the role of fiscal policy within price sta-
bility by establishing government debt thresholds for net and gross debt.
These thresholds are then used to establish the non-linearities they intro-
duce in the transmission of government debt and the role of the price
stability mandate. Furthermore, selected chapters in this part of the book
investigate the extent to which positive income tax shocks impact the
trade-off between inflation and output growth volatilities or, alterna-
tively, the Taylor curve. The effects of expansionary fiscal policy shocks on
the current account to test the twin deficits hypothesis are also explored.
The last part of the book explores the potency of the output channel of
borrowing costs and sovereign debt changes. Furthermore, this part
assesses whether inflation neutralizes the multiplier effects of expansionary
monetary and fiscal policy on GDP growth.
The Tax Revenue Policy Channel
The analysis conducted in this part of the book separates the fiscal policy
effects of those linked with the taxation channel from those due to the
government consumption spending channel. This part shows the role and
impact of the government debt threshold regimes on the transmission of
tax revenue shock effects to economic growth. These effects are compared
to those of other fiscal policy variables in driving inflation and GDP
growth dynamics. The interaction between monetary and fiscal policies
via the effects of (i) income tax shock impacts on the trade-off between
inflation and output volatilities (ii) tax shocks on financial and credit
conditions and implications for inflationary pressures (iii) tax revenue
interaction with the repo rate and inflation dynamics.